Losing a loved one is undoubtedly a challenging and emotional time. Amidst the grief, there are practical matters to attend to, such as understanding the implications of a mortgage when the borrower passes away. This article aims to provide information regarding what happens to your mortgage once you die, how you can plan and avoid mortgage issues, and your heirs. Also, what you need to know if you’ve inherited a home after a loved one has passed.
Who Takes On Your Mortgage Debt When You Die?
The first thing you should know is the debt is recouped from your estate when you die. After the borrower's passing, it's essential to contact the mortgage lender as soon as possible. What this means is before any assets can be passed onto heirs, the executor of your estate will first utilize those assets to pay off your creditors.
However, if someone co-signed the loan or is a co-borrower with you, nobody is required to take on the mortgage. Speaking of which, if the person who inherits the home decides they want to keep it after all, there are laws in place that allow such activity to pass. The surviving family member who inherited the property will continue making payments to keep the mortgage current while they make arrangements to sell the property.
If or when you die and nobody takes over the mortgage, then the mortgage servicer will begin processing foreclosure on the home.
Taking Over a Mortgage on an Inherited House
In most cases, when a mortgaged property transfers ownership, a due-on-sale clause, or alienation clause, requires the full loan amount to be paid right away. There are laws that favor heirs to where they are protected by allowing them to take over the title of the home. What does that mean? It means the heir is the legal owner of the home without triggering the due-on-sale clause.
Theoretically, heirs should be able to continue making payments to keep the mortgage current, even if the account hasn’t yet been legally assumed by the heir. However, there are exemptions to this situation, when the mortgage has a co-signer. Let’s say someone co-signed the mortgage loan, no matter how much ownership was provided to them initially, they take full responsibility on the mortgage.
How Can I Get Information on the Mortgage?
To pull this off, you’ll first need to speak with the servicer of the loan and let them know that you’ve inherited the property. What you’ll need to provide is proof of the person’s passing and other supporting documents showing that you are the rightful heir to the home. Afterward, the servicer will let you know what else is required.
The servicer must provide you with information about how to continue making payments and what are your options for assuming the loan.
I Just Inherited A House, What Are My Options?
After you have contacted the servicer, you’ll need to decide how you would like to proceed with the house. Be sure to have a small number of heirs that way you can avoid any disagreements that could delay other processes. If your situation is more complex or you expect conflict amongst the heirs, it may be a good idea to get a lawyer involved.
You Could Sell The House
One of the obvious decisions you could make is selling the home, however, there’s more to it. Selling the home will give you the chance to pay off the mortgage and distribute any leftover funds from the sale to the heirs as dictated by law or will in your state. If you want to retain the home, you’ll need to work with the servicer to get the mortgage transferred under your name. However, if your finance cannot manage the responsibility to take on the mortgage, you can ask about loss mitigation. Choosing this option can help you stay in the home and avoid foreclosure; this is similar to getting a loan modification.
Let’s say there was a reverse mortgage on the property, the loan amount becomes due after the death of the borrower. Any heir entitled to the property that wants to keep it must pay back the loan. The heir can sell the home or turn the deed over to the reverse mortgage servicer to satisfy the debt which then causes a reverse mortgage foreclosure.
Refinancing the House
It’s easy to sell the home and be done with any responsibilities of maintaining the property. What if you want to keep the home and your co-inheritors don’t? An option to consider is to simply buy the other heirs to the property. That’s usually not the case since most of the time the person doesn’t have the funds readily available.
Refinancing the home will alleviate some funds that you can use to buy the other heirs and assume ownership of the property. Remember, doing this will permit you full responsibility for making payments to the mortgage.
There’s Ways to Prevent Problems
The time after the death of a loved one can be fraught as the family tries to figure out what is to be done with everything the deceased left behind. When you plan in advance, it can help avoid disputes and ensure that any dependents you have will be provided for in the event of your passing.
Mortgage Protection Insurance
Another option to consider for avoiding issues with your mortgage if you die is to purchase mortgage protection insurance, also sometimes called mortgage life insurance. Unlike regular life insurance, which is paid to your beneficiaries, MPI is paid directly to your mortgage lender to cover some, if not all, of your remaining loan.
Mortgage life insurance can be beneficial if you want to ensure that your loved ones won’t be burdened by any outstanding mortgage payments left by you after your death. Keep this in mind, there are a few drawbacks to consider. For starters, many insurers require you to enroll in mortgage protection insurance within a few years of closing on your home, in that case, if you didn’t do it, odds are this option won’t work for you. Also, what this means is that older homeowners who have lived in their homes for years may have difficulty obtaining a policy. Not to mention, the monthly premiums also tend to be expensive. Depending on their circumstances, some homeowners may prefer to invest that money in a traditional life insurance policy instead, which will allow their heirs the flexibility to use the payout as they see fit.
When You Are Planning for The Estate
When you construct a will that allows you to dictate who receives what out of your estate when you die is an important tool for homeowners. Most of the time estates are created to ensure that their home is transferred to the appropriate party. Creating an enforceable will is especially important if you have loved ones you aren’t related to who you would like to have a right to own the home. If there’s no will, the inheritance will be determined by your state’s laws, which generally only consider the deceased’s legal relatives to receive portions of the estate.
During estate planning, you may also consider refinancing your home to lock in a lower interest rate. You’ll have a higher chance of lowering the financial burden on any outstanding mortgage payments.
Here's the Bottom Line:
Pondering our own passing or the passing of a loved one is never easy. But taking steps now to plan for the eventual transfer of your property, as well as any outstanding mortgage payments, can help give both you and your heirs peace of mind. Speaking with an estate planner or financial adviser can help you decide what options may be best for your personal situation.
If you’re considering refinancing a mortgage as part of your estate planning or because you’ve inherited a home from a loved one, we can help. If you’re looking to refinance or purchase a new property, contact us at 210-366-1070. At Gold Financial Services, we provide outstanding service and solutions to all your needs. We have proudly served the San Antonio community for over 25 years.